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Experts talked about how to reduce the likelihood of losses when trading cryptocurrencies, and what skills and tools allow you to do this
Risk management in cryptocurrency trading is as relevant as with any other work with financial assets. The long-term success of a trader largely depends on the ability to calculate risks and understand how they can be reduced.
Risk management is not a tool for maximizing profits, its task is to, despite the current market situation, stabilize income and, if possible, avoid losses. Risk management when trading cryptocurrencies will not bring quick and easy income from the rise of “promising” altcoins, but it will help protect funds from unsuccessful investments.
Experts told RBC-Crypto about working with risks in the cryptocurrency market and gave recommendations on how to avoid making rash trading decisions
Features of risk management in a bear market
The bear market is perceived as an excuse for reducing positions and fixing profits not by everyone and not always, says Artem Deev, head of the analytical department of AMarkets. According to him, some investors use this moment to revise the portfolio, reduce investments in the most risky assets and increase positions on those assets that have growth prospects when the trend changes. This approach, according to the expert, can be called risk management in a situation where cryptocurrencies are declining.
Traders can include several strategies in their arsenal at once, one of which can be “sharpened” precisely on bear markets, said Aaron Chomsky, head of the investment department of ICB Fund. To optimize the parameters of certain indicators and technical analysis tools, data from previous similar states will be used, the expert noted. He specified that during its thirteen-year history, the cryptocurrency market has passed four bear markets, now the fifth is developing.
All other things being equal, both upward and downward trends consist of impulses and corrections, the expert explains. But he drew attention to the fact that given the inherent depth of pullbacks from historical highs and the frequent models of “Pump & Dump” schemes, most active traders do not give up the opportunity to earn on short positions.
Risk Management Tools
To limit risks, a trader initially needs to test the parameters of the developed trading system on historical data and in “combat” conditions, says Chomsky. He explained that this system should have a positive mathematical expectation, cover costs and be extremely conservative in order to take into account slippages during periods of low liquidity and missed successful transactions (if trading is conducted in “manual mode”).
The statistics obtained will allow you to determine the maximum available limit on the transaction, which on the one hand will correspond to the size of the possible drawdown of the deposit that is comfortable from a psychological point of view, on the other hand, it will maximize profitability, the expert said. He clarified that for position management, tools or a proven skill for quickly placing orders to close positions to limit losses or fix profits are desirable.
Traders can use sound signals or notifications in the form of pop-up windows (depending on the functionality of the trading terminal), which warn about approaching the levels of opening positions or placed orders, the expert says. He also pointed out that it is important to keep in mind a calendar of macroeconomic events, subscribe to “alerts” in social networks on on-chain analytics and crypto media, as well as monitor the nature of changes in price dynamics.
How to calculate the risk and avoid hasty decisions
The risk and size of positions are calculated based on the results of testing trading strategies: the ratio of the number of profitable and unprofitable transactions, as well as the average size of profit and loss, explained the head of the investment department of ICB Fund. According to him, the optimization of such types of orders as take profit (closing a deal at a profitable rate) and stop loss (closing a deal to avoid a loss with an unfavorable price movement) will allow achieving more effective capital management, determining the desired size of positions.
In order to avoid “over-trading” or overtrading (excessive opening of positions), it is first of all important for a trader to be sure.In his trading strategy, the expert believes. He explained that it is necessary to transfer its execution from the conscious to the unconscious level as when driving a car – by accumulating experience.
You also need to understand that the supply of mental strength is finite, so it is important to determine the optimum that allows you not to disturb the balance of life and not to undermine health – for example, to trade only eight hours at the most volatile time of the day, Chomsky advised. He explained that in order to deal with stress and not fall into tilt (a state of anger due to unsuccessful transactions, which makes the trader use more aggressive strategies), it is important to replenish the supply of psychic strength with what brings pleasure and joy, for example: sleep, sports, hobbies, communication with friends and other pleasant things. During the trading day, be sure to switch attention, do small warm-ups and walks, optimally – after closing the transaction, the specialist recommends.
According to Artem Deev, Head of the Analytical Department of AMarkets, it is important not to panic at sharp price fluctuations, since in conditions of instability this always happens and will continue to happen. Reduce investments in the most risky tokens, increase the share in the portfolio of major coins, whose rates relative to other assets are more stable for a long period (bitcoin, ether), says the analyst.
“Do not make hasty decisions and use the most optimal moment to expand investments in positions that will grow over time no matter what. Cryptocurrencies are gradually becoming an increasingly familiar financial instrument around the world, so their growth is inevitable, “Deev is sure.
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